The paper analyses the consequences of structural change in the presenceof non-stationary stochastic processes I(1) or I(2). The structural change mayconcern the deterministic structure (in particular, the trend and the constantterm) as well as the process generating the stochastic part. The focus of thepaper is on the case of a discrete change in a regime for which the momentof switch is known. A change in the deterministic part does not alter thecharacter of the cointegration relationships but its consequences for cotrendingand cobreaking are interesting. The consequences of a change in the stochasticpart are more complex, because then the stochastic process as well as thedeterministic structure of the VECM are modified. The restrictions are analysedfor both cases.

In this paper the identification problem is considered for initial conditionsin a non-minimal state-space model that includes interpretable state variablesgenerated by non-stationary stochastic processes. In order to solve theidentification problem, structural restrictions are imposed on initial conditionsin a state-space model with redundant state variables. The correspondingrestricted maximum likelihood estimator of initial conditions is derived.The restricted estimator of initial conditions can be used in order tocompute uniquely identified realizations of interpretable latent variables. Theidentification problem is illustrated analytically using a simple structuraleconomic model.

This paper investigates the relative importance of cost, demand, financialand monetary shocks in driving real exchange rates in four CEE countries over2000–2018. A two-country New Keynesian open economy model is used as atheoretical framework. In the empirical part, a Bayesian SVAR model withMarkov switching heteroscedasticity is employed. The structural shocks areidentified on the basis of volatility changes and named with reference to the signrestrictions derived from the economic model. Main findings are fourfold. First,real and financial shocks have similar contributions to real exchange variability,whereas that of monetary shocks is small. Second, financial shocks amplifyexchange rate fluctuations stemming from real shocks. Third, even though theexchange rate gaps change over time, they remain quite similar across CEEcountries except for Slovakia. Fourth, Slovakia introduced the euro at the timeof a relatively large real overvaluation, which subsided after a lengthy adjustmentprocess.